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How Colleges and Universities Can Help Their Local Economies

Policymakers are increasingly viewing colleges and universities as important engines of growth for their local areas. In addition to having direct economic impacts, these institutions help to raise the skills of an area’s workforce (its local “human capital”), and they do this in two ways. First, by educating potential workers, they increase the supply of human capital in a region. Perhaps less obviously, these schools can also raise a region’s demand for human capital by helping local businesses create jobs for skilled workers. In this post, we draw on our recent academic research and Current Issues article to outline these pathways and how they might inform local economic development policy. (We also discuss our findings in a new video.)

Colleges and universities are assets to their regional economies, especially because they spend money in their local areas and employ local workers. The higher-education sector also tends to contribute stability to a region since it’s less susceptible to downturns than other sectors of the economy. Indeed, the education sector expanded before, during, and after the Great Recession.

These institutions also play an important role in their local economies by helping regions build their skilled workforces. This contribution is significant because regions with higher levels of human capital—measured by the share of the working-age population with at least a bachelor’s degree—tend to be more innovative, have greater amounts of economic activity, and enjoy faster economic growth, and workers in these regions tend to be more productive and earn higher wages.

One pathway through which colleges and universities can increase their region’s human capital is by affecting the supply of workers—producing college graduates who can potentially enter the local labor market. But newly minted graduates are a highly mobile group, so it’s not necessarily true that producing more degrees will increase the local supply of skilled workers. Graduates need jobs, which may or may not be available, and they also may want to live in a different place than where they earned their degrees.

The second pathway—increasing the local demand for human capital—is at least as important. Colleges and universities play a role in raising demand for high-skilled workers through their research-and-development activities that have spillover effects into the local economy. Businesses can take advantage of university knowledge and research facilities to develop new products and technologies, and new companies may be drawn to the region because they want access to university resources. In fact, most major research universities have established technology transfer offices in an effort to more effectively harness the synergies between university research and commercial product development. These interactions can generate new jobs requiring high levels of human capital, which are filled by workers who got their degrees locally or from somewhere else.

There are many examples of these types of effects throughout New York State. At the University at Albany, for example, a consortium of computer chip fabricators works together with research faculty on the university’s campus to develop products and technologies, and these companies gain access to cutting-edge laboratories and supercomputers. In Ithaca, home to Cornell University, there are more than eighty companies—in industries ranging from information technology to medical equipment to agriculture—located in the metro area with direct ties to the university. Many of these businesses were started by Cornell’s faculty or students, and have remained in the local economy to stay connected to the university. Other companies have been attracted to the region because they gain access to specific knowledge or new products and processes invented at the university.

Indeed, our research provides evidence that colleges and universities can raise local human capital levels by increasing both the supply of and demand for skill within metropolitan areas. We find that doubling a metropolitan area’s degree production is associated with a 3 to 7 percent increase in local human capital levels. At the same time, doubling a metropolitan area’s research intensity is associated with a 4 to 9 percent increase in these levels. While these effects appear to be relatively small, they suggest that an increase in higher education activity can result in a permanent shift in a region’s human capital stock.

We also find evidence that the activities of colleges and universities can alter the composition of local labor markets. In particular, metropolitan areas with a larger amount of higher-education activity tend to have a higher share of workers in high-skilled occupations, such as computers, math, and science, as well as business-related fields. This relationship suggests that linkages between local economies and higher-education institutions are strongest in economic activities requiring innovation and technical training. And, significantly, activities in these areas have been shown to be particularly important drivers of local economic development.

While these measured effects are relatively small, they do suggest that regions can in fact increase their skilled workforces by more effectively harnessing the potential of their higher-education institutions. An important lesson from our research is that policymakers seeking to maximize the economic impact of their local colleges and universities should consider policies beyond retaining local graduates; helping local businesses create high-skilled jobs is at least as important, and can be accomplished through fostering partnerships between businesses and their local colleges and universities that help them take advantage of the fruits of research.

Disclaimer The views expressed in this blog are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York, or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

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Very nice write up. I think that the formal spillover channels are very important, as you both note. But informal channels are also important in university towns. Often times, useful tacit knowledge spills over in, for example, bars and coffee shops. This is why a vibrant social scene usually goes hand in hand with a thriving and innovative local economy.

So, from an economic development perspective, it’s not enough to just try to merge together higher-education institutions and businesses; policymakers also need to make sure that the environment around a college is trendy, so that knowledge also spills over through informal channels. Of course, making sure that crime is minimized is very important. Of the many college-towns I’ve visited, it seems as though the regions in which crime rates are low are the ones that have developed into innovation hotspots.

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